The announcement last week that Abu Dhabi Development Holding Co. (ADQ) is set to buy control of Israel’s largest insurance company Israel Phoenix Assurance Ltd. (TASE:PHOE1; PHOE5) continues to make waves on the Tel Aviv Stock Exchange (TASE).
At the moment it is hard to tell whether the local regulator will allow US funds Centerbridge and Gallatin Point Capital to sell a 25% stake to ADQ. If the deal goes ahead it will be for NIS 2.3 billion, reflecting a company valuation of NIS 9.2 billion for the Phoenix.
There are also those in the capital market and among Israel’s public who oppose the deal and argue that at the very least the restrictions should be tightened on any new owners of an insurance company that manages more than NIS 370 billion in assets, the vast majority of which are public savings in Israel.
A senior capital market manager said, “If I were the Supervisor of Capital Markets, Insurance and Savings, which is the main regulator that needs to approve the deal, I would either not approve it at all or I would approve it subject to very strict conditions, much stricter than those established by the Supervisor.
He mentions the circular about “directors of a public organizations,” which currently says, among other things, that the chairman of the board does not have to be Israeli, or even live in Israel permanently. But the senior capital market manager says that to protect the interests of savers, the conditions must be tightened and adds that the chairman of the board and the majority of members of the board of directors should be Israeli. He also insists that one must ensure compliance with another condition that is defined in the same circular, by which all members of the investment committee in a company must have Israeli citizenship, reside in Israel and be proficient in Hebrew.
He says that the Supervisor can be assisted in reducing foreign involvement by other regulators, such as the Bank of Israel, with regard to concerns about money laundering, and the Israel Securities Authority (ISA), since the Phoenix owns a company for managing investment portfolios and mutual funds.
He says, “The main concern is about the ability to prevent the intervention of a foreign organization in managing investments, in a way that will tilt the investments in a direction that will match the general policy of that governing body. It is possible to frame and define activity to prevent such a bias, but since (ADQ) is a government fund, it complicates matters. On anything that they seek to intervene, and as someone who knows the capital market closely, I know that foreign bodies tend to intervene, it will immediately take on a political color and signal danger of a diplomatic crisis.”
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Regarding restrictions imposed on any purchasing company, he compares them to trying to trap water in a pool, which will always look for the weak point to flow out. “No matter how much they try to think in advance how to prevent interference, those who want to intervene and control the levers of pressure – can get what they want. It’s hard to close all the loopholes. On the other hand, if a company buys another company, you can’t tell them this is forbidden or that is forbidden, because then they ask themselves what are they getting from the investment they’ve made? It is impossible to neutralize them from influence completely because they are the controlling party, so there is also a limit to the restrictions.”
In a small market like Israel the risks are especially big
Of course, attempts by controlling owners to influence financial corporations under their control are not relevant only to foreign controlling owners. It is enough to recall control of IDB and thus Clal Insurance by Nochi Dankner more than a decade ago, to understand that the risk of the intervention by a domestic controlling shareholder in such a small market as Israel, may be even greater.
However, unlike Israeli internal interference in the power relations between controlling owners and investment committees, which should be completely separated from the board and management, when a fund controlled by a foreign government is involved, any disagreements may have a geopolitical tone.
“The bottom line is that it is dangerous to approve the deal, not only in terms of attempts to interfere in investments, with all the restrictions that will be imposed, but because of the explosive potential that could lead to a deterioration in relations between Israel and Abu Dhabi. But it is clear that incoming Prime Minister Benjamin Netanyahu has an interest in this matter to show that the Abraham Accords are bearing fruit. “Obviously there will be pressure from the buyer as well as from the sellers. The US funds will ask if Israel is a free market only when you can buy, but when you want to sell – then it is no longer a free market,” says the senior capital market manager. “I don’t know who will become the Supervisor of Capital Market, Insurance and Savings (currently Amit Gal holds the position as deputy), but they will have to be very strong to withstand all these pressures.”
“Change doesn’t happen in one day but seeps in”
Immediately after publication of the signing of the memorandum of understanding to buy control of the Phoenix, a political figure told “Globes” that the decision to approve the deal should be made at the political level rather than by regulators due to the Israeli government’s interest in fulfilling the UAE commitment to invest $10 billion in Israel.
The senior political figure said, “If it was a private company from Abu Dhabi, it could have been put through the professional channels and likely there would be no reason to disqualify it, just as they did not disqualify the American funds that control the Israeli insurance group today. But given that it is a government-owned fund, it is easier to be bad and say no in advance. Will this be helpful? I’m not sure.
“But will the Emirati really be able to change Phoenix’s DNA? Re-channel investments or block reforms? There are very good people at the Phoenix today. But what will happen if tomorrow they change. The term of the members of the investment committee will end and there could be pressure to appoint new directors and external board member. Everything can change. When a business is sold and a new controlling owner arrives with a different organizational culture, the change does not happen in one day, but slowly it seeps through. It is not necessary for the buyers to make dramatic changes, it is enough that it conveys invisible messages so that people in the organization understand what the commander wants, and align themselves with where the wind is blowing.”
“The Abu Dhabi fund does not need the savings”
On the other hand, a former financial services company executive who knows well what is going on between the insurance companies and the regulator, is less worried about the identity of the potential buyer, compared with previous interested parties in Phoenix, such as Chinese investment funds. “The concern with the Chinese was that they would try to divert savers’ funds to uses that are convenient for them, but not good for Israeli savers. This is not the case here. The Abu Dhabi fund does not need funds, they have excess funds, so the situation is the opposite – they will want to invest.
“That’s why I’m not concerned that they will divert funds to bad uses or that they will withdraw funds. The only thing that might happen is that they would want to participate as a co-investor in Phoenix’s investments, and I don’t see anything bad in that. It will increase the involvement of the State of Israel by parties we want to be in contact with. These funds bring knowledge and connections and the Phoenix can build on that, so there are also benefits to the deal and not just concerns.”
According to this executive, the question is not whether or not to give a permit, but under what conditions. “In any case, the insurance regulator has the right to intervene in what is going on at the insurer from now until further notice, and if they are vigilant enough they will be able to make sure that nothing inappropriate happens. I also heard concerns about the use of the customers’ information. Those who have control over an insurance company or any other institutional body do not have individual information, but only in an aggregated manner that does not allow identification.”
Published by Globes, Israel business news – en.globes.co.il – on December 21, 2022.
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